Measuring the New Zealand Transaction Sector, 1956-98,
with an Australian Comparison.

Abstract:

This paper uses a modification of the Wallis and North (1986)
method to generate estimates of the size of the transaction sector in
New Zealand from 1956 to 1996, encompassing the pre-1984 period of
unusually stringent (by OECD standards) restrictions and controls on the
extent of market activity, followed by the liberalisation reforms of
1984-91. The ratio of transaction to `transformation' (production)
employees increased quite slowly for the first twenty five years, then
increases sharply in the 1980s, before stabilising in the 1990s at about
0.68, implying two workers in five occupied in transaction activities.
The most striking increase is in the number of managers, which more than
quadrupled. Because of this, the share of transaction employment is by
now higher than in Australia.

Economists know that markets are not `free'; that the bringing
together of supply and demand is itself an economic activity using real
resources. And we know that real-world firms are not dimensionless
`atoms' -- that profit maximisation (or whatever firms do) also
requires resources devoted to coordination and control. At least since
Coase's (1937) now famous article on the nature of the firm,
theorists have worked on the analytical implications of non-trivial
coordination and control, developing the fields of Transaction Cost
Economics, Agency Theory, and Game Theory. But much less attention has
been paid to the empirical side of these issues, in particular to
establishing the quantitative importance of transaction costs as a user
of the economy's scarce resources.

In a pioneering analysis, the economic historians Wallis and North
(1986) constructed estimates of the `transaction' sector of the US
economy from 1870 to 1970, measured at ten year intervals. They find
that the share of GNP absorbed by transaction activities -- basically,
the coordination and control of production and marketing -- begins in
1870 at about 24%, rises quite steadily to reach 55% by 1950, and
remains at about that level for the next decade. This number includes
the rather large proportion of US GNP then diverted to Defence
expenditures (9%).

That is, if the Wallis/North methods are valid, transaction costs
are indeed significant and have become relatively more so over time.
These historians attribute the upward trend to the inherent properties
of the process of development and modernisation, as the increased
division of labour and specialisation on which improvements in
production efficiency depend demands increases in the resources devoted
to coordinating and monitoring activities. Such implies an interesting
trade-off: to produce more goods and services we need finer partitions
of the labour force, but such partitions are in themselves costly, in
that they reduce the quantity of resources available for direct
production or `transformation' activities.

This paper uses a modification of the Wallis/North method to
generate estimates of transaction employment in New Zealand at five
yearly intervals from 1956 to 1996, with a provisional extension to
1998. With some coarsening of the procedures due to data limitations,
comparisons are also made with Australia, for the 1961-96 period. The
analysis thus straddles two very different epochs in New Zealand's
economic history: the 1938-84 period of unusually stringent (by OECD
standards) restrictions and controls on the extent of market activity,
followed by at first gradual then very rapid commercialisation and
liberalisation of the economy, with the period of most radical reform
being 1984-9(1)

In this context, we might expect to see the modernisation process
showing up in rather accelerated form in New Zealand, in comparison with
the US and, perhaps, with Australia, which also has liberalised its
economy, but less drastically than in NZ. It is also interesting to
establish the timing of the process -- in particular, the extent to
which structural change preceded the post-1984 reform program.

This is what happened. The ratio of transaction to
`transformation' (production) employment in New Zealand increased
quite steadily for the first twenty five years from 1956, when it was
0.35, to 1981, at 0.50 -- an increase of 43%. Then there was a ten-year
spurt, to 0.68 in 1991 (a 36% increase), followed by stabilisation in
the 1990s. That is, by now about 40% of the work force is involved in
transaction activities.(2) Compared with Australia, the
transaction/transformation ratio is lower from 1961 to 1981, then
overtakes and stays above the larger country's number.

Increases in transaction employment were observed in the `market
making' sectors -- legal services, accountancy, data processing,
finance, insurance and real estate. But the most striking increase
occurred in the internal organisation of firms and other organisations
-- the ratio of managers to non-clerical subordinate workers in New
Zealand increased nearly threefold over the forty years between 1956 and
1996, and grew particularly quickly from 1981 to 1991, whilst its
Australian equivalent showed almost no trend at all, and is by now well
below the NZ number. Thus, it appears that operating in a liberalised
market environment required increased managerial input within firms, as
well as more resources devoted to defining, transferring and protecting
property rights.

The paper is set out as follows. The next section follows Wallis
& North in setting out the conceptual issues involved in dividing
the labour force into transaction and transformation workers. Section 3
discusses measurement and data sources. Section 4 gives the results for
New Zealand and Section 5 makes the comparisons with Australia. Section
6 concludes the body of the paper. An Appendix describes in detail the
construction of the database.

2. Conceptual Issues in Measuring Transaction Costs

The methodology to be used is, with modifications, that of John J
Wallis and Douglass C North (1986), who begin by noting that
specialisation and the division of labour necessarily introduce the need
for coordination. Specialisation means that each productive unit
produces a surplus (to their personal requirements) of a small range of
goods and services, which must somehow be exchanged for the surpluses of
other producers to achieve a balanced consumption portfolio. So how do
these exchanges or `transactions' occur?

Possible methods of coordination and control include main force
(theft), chance (lotteries), and custom. Modern civil society, however,
relies on two broad technologies for effecting economic transactions:
price-mediated voluntary exchange in markets, and submission to
established authority relationships within organisations such as
firms.(3) That is, when the price and the transfer of good or service
are linked directly, we observe we are in a `market' situation;
when the exchange occurs `upstream' of the priced transaction -- as
when a worker on, say, a monthly contract performs tasks within that
month as assigned by a manager -- we are in the world of
`administration' or `hierarchy', as found within firms.

To operationalise the measurement of resources devoted to
coordinating exchanges, Wallis and North develop a distinction between
`transformation' and `transaction' activities. Transformation
is the act of adding inherent value. It may involve the physical
transformation of material objects, such as combining wood and nails
into the frame of a house, or spatial/temporal transformation, as when
the wood and nails are delivered from the factory or shop to the
building site, or intellectual transformation, as when an architect
produces a plan for the house.

Transaction activities involve the transfer and protection of
property rights. In the case of a house, they arise in particular when
the house is sold, and include the expenses born by the buyer which are
not passed on to the seller, and those incurred by the seller which
would not have been necessary had the house not been sold. Wallis and
North include in the buyer's transaction expenses the legal fees,
financing costs, and costs of searching for houses and gathering market
information. The seller has to pay real estate agents' expenses
and/or commissions, and also bears the damage and inconvenience of
having prospective buyers and curious neighbours tramp through the house
on Open Days, and so on.

For the case of sales workers in general (of whom real estate
agents are a particular example), it will perhaps help the reader if we
run through the reasoning needed to distinguish transformation and
transaction activities. When you, a potential customer, enter a shop,
what are the sales people doing? If they are stocking the shelves and
guiding you to the goods you seek; that is `transforming' -- moving
things and people from where they are not useful to where they are.(4)
If they are taking your payment and making sure you don't steal the
stock: those are transaction activities, which would not be needed if
you produced the goods for yourself.

When property rights are not being transferred, they must be safely
`stored', an activity which involves the legal system, police and
guards, insurance, and the expenditure by the house owner on locks and
alarms and perhaps the emotional stress of lying awake at night being
frightened by strange noises (the last of which will again not be
possible to tease out of the available aggregated statistics). The
guarding-the-stock activity can be described as preventing involuntary
(on the part of one party) exchange. We call this a transaction activity
because without it the system based on voluntary exchange transactions
could not function efficiently.

The above discussion refers to market exchange situations between
voluntary buyers and sellers. The other great class of economic
transactions occurs within firms and other organisations, when goods or
services are passed along a value adding chain with no money changing
hands (though input services are eventually paid for) and to an extent
involuntarily (by order of a supervisor). All managers, administrators
and supervisors are judged by Wallis and North to be properly counted as
transaction workers, who would not be needed if the division of labour
did not introduce the jobs of coordination and monitoring. Clerks and
data processors are record-keepers for market and bureaucratic
transactions. Secretaries are complementary inputs to managers.

There may be some over-estimation here, since managers also do
`creative' work such as visualising new combinations of
value-yielding resources, but, on the other hand, many primarily
transformation workers, especially more highly skilled technicians and
professionals, have some involvement in management activities, be this
as informal or part-time supervisors of other workers, or in
interactions (such as meetings) with managers.

It should perhaps be noted here that `decision making' is not
per se a transaction activity. Workers making decisions for themselves
are basically pitting their own strength and knowledge against the laws
of nature -- `if I cut these bits of woods in these places and nail them
together in this pattern I will make a house' -- it is someone
telling someone else what to do to build a house w rather than do it
themselves -- who is involved in a transaction, as a supervisor or
manager.

We will show results that include the unemployed in the transaction
sector. The Americans neither include or mention unemployment, perhaps
because they are so accustomed to it. But we are not accustomed to mass
unemployment in New Zealand: it is a quite recent phenomenon, and it
might not be proper to ignore a number which has risen from less than
one percent of the workforce to as much as eleven percent in just a
twenty year period. All existing models of unemployment -- Left, Right
and Keynesian -- give it what in our context is a transaction cost
interpretation, due to some consequence of specialisation and the
division of labour. The original rationalisation of the Phillips Curve,
by Richard Lipsey, had unemployment as a `structural' phenomenon
caused by Keynesian downward wage rigidities impeding the rapid flow of
labour between expanding and contracting industries. In monetarist
search models, unemployment is voluntary and productive investment in
better worker-job matches, and fluctuations in joblessness are because
of misperceptions of prices and wages. In market power models,
unemployment is necessary to discipline the wage claims of employed
workers and their unions. In all these explanations, it is
specialisation and exchange that generates -- really, requires --
unemployment. There is no unemployment in a single-household economy.

This conceptual section closes with discussion of three problematic
groups: criminals, teachers, and soldiers. By definition, criminals are
not `transformers' -- that is, they are not producing directly
useful goods and services, at least in the eyes of society. Most crime
(about two thirds) is property crime, and so could be assigned to the
transaction sector, as one of the by-product costs of running a system
based on formal property rights. But other illegal activities, such as
crimes of passion, do not fit neatly into either transaction or
transformation categories. We will not resolve this issue here.

Teachers illustrate a number of the conceptual issues raised above.
To the extent that they are child-minding while the parents work, they
are part of the transaction sector, facilitating the division of labour.
To the extent that they are socialising the students by teaching them
the norms and techniques of participation in economic life, and are
contributing to more sophisticated signalling and credentialism
exercises justified by costly asymmetric information, they are also
performing a transaction sector activity. But to the extent they are
adding to human capital that can be used in transformation activities
they should (along with the producers of physical transformation
capital) be classified in the transformation sector. This is quite clear
in the case of teaching science and technology, less clear for the
teaching of languages. As for social sciences, such as economics,
teaching and research in these fields is surely directed at
understanding how (specialised) inputs fit together -- surely, a
transaction sector activity. This is not, of course, to say that
teaching economics is not useful -- a point which deserves emphasis.
Contributing to a better understanding of how the economic system
functions will help towards improving the functioning of the economy, in
terms of its ability to deliver goods and services that are directly
valued. However, we will not attempt to sort teachers into transaction
and transformation activities -- all will be assigned to the
transformation sector.

Soldiers present an interesting final case. Wallis and North
include expenditure on national defence, which they interpret as the
costs of protecting property rights on a larger scale, in the higher of
their two definitions of the transaction sector. We will follow this
precedent here, though it may be true that neither Australia or New
Zealand's current military resources are capable of protecting
their sovereign property rights.

To conclude. The conceptualisation of the distinction between
transaction and transformation activities is not straightforward, and
raises many interesting, and often quite enjoyable points of definition
and delineation. The best we can hope for is to establish a reasonable
set of criteria which can be applied in a consistent fashion to the
actual data, to which we turn now.

3. Measurement and Data

If transaction activities are exchanged for money, and if such
exchanges are picked up in the national accounts, then, in principle,
they could be measured from either side of the accounts as value of
output or value of input. In practice, this is possible for coordination
activities sold on the market, such as accounting services, but not
directly for coordination services buried inside firms and other
organisations, such as management supervision and clerical work.

Despite this, Wallis and North did work with an output measure,
estimating the value added by transaction sector activities. For
within-firm transaction activities they take the number of employees --
an input measure -- assume that transaction workers are paid the same as
transformation workers within each industry, and take the resulting
estimate of the wage bill as the transaction activity contribution to
GNP (value added) from that industry. This is not entirely satisfactory.
Some transaction workers are likely to be paid more (managers) and
others less (secretaries) than the average wage. And the wage bill
measure excludes the contribution of capital services, which of course
are included in the directly measured value added of dedicated
transaction industries.

The approach adopted here is the simpler and more direct one of
working with an input measure, the number of members of the labour force
involved in each type of activity. This approach can be defended not
just for its computational accessibility, but also conceptually:
transaction activities are an intermediate input to production, and it
is the changes in the organisational technology of the economy as
reflected in changes in transaction inputs that we wish to analyse.

We distinguish where necessary between what people do (occupations)
and where they do it (industries), and adopt, with one exception, an
`all or nothing' approach, assigning the complete contents of an
industry or occupation cell to either transformation or transaction
activities. The unit of measurement is Full Time Equivalent Employment
(FIRE), with part-time workers converted using the Statistics New
Zealand convention that one part-time worker is equivalent to half a
full-time worker.(5)

All industries are transformation industries except the following.
Within the private sector we distinguish four broad categories of
dedicated transaction industries, following Wallis and North: Finance,
Insurance, Real Estate (collectively known as the `FIRE' sector),
and Business Services (which includes legal and accounting services,
data processing, and guards). In the NZ numbers reported in the next
section, some industries within these broad categories are assigned to
the transformation sector -- Life Insurance and Architectural and
Engineering Services, for example -- but in making comparisons with
Australia it is not possible to separate out these more disaggregated
industries, and we are forced to follow Wallis and North in assigning
all business services to the transaction sector, for both countries.

From the public sector, national and local government contributes
to the transaction sector the police, and its general administration
functions (eg, not teachers but counting the Ministry of Education in
Wellington). Defence employment is included also.

Transaction workers use some transformation sector outputs (eg
office supplies) as intermediate inputs. We assign the workers involved
in producing these outputs to the transaction sector of the economy,
using the same procedure for both countries. From various years'
Input-Output tables we compute the value of transformation sector output
used as intermediate input per dollar of transaction sector gross
output, and also the gross output per employee for transaction and
transformation industries in total (using the employment data
constructed as explained above). From these two ratios we can get an
average figure for the fraction of a transformation sector worker needed
to supply intermediate input to each transaction sector worker. These
fractions or ratios are interpolated and extrapolated to get estimates
for each of our census years.

To avoid double-counting, we must subtract from our figures for the
numbers in transaction occupations those who are employed in transaction
industries (eg, bank managers). Census tables giving occupational
numbers broken down by industry groups are used to estimate ratios of
managers, clerks and (one half) sales workers to total employment in the
private and public sector transaction industries. Unemployed numbers are
registered unemployed in New Zealand, and Labour Force Survey data in
Australia.

All managers and clerks (which category includes secretaries) are
counted as transaction occupations. As for sales workers, having noted
above that they are likely to be involved in both transformation and
transaction activities, and because they are quite a large group,
accounting in 1996 for 8.6% of total NZ employment FTEs, we depart from
the `all-or-nothing' rule and assign them 50:50 to each sector. The
share of sales workers in total employment changed little over the forty
year data period, so errors in our allocation will have the following
effects. If in fact more than 50% of sales work is properly attributed
to the transaction sector, then we will have underestimated the share of
that sector in total employment, and overestimated its growth between
1956 and 1996. If the measurement bias is in the other direction, we
will have overestimated the size of the transaction sector and
underestimated its growth. Wallis and North simply assign all sales
workers to the transaction sector.

Constructing consistent time series for numbers in the three
transaction or partially transaction occupations
(administrative/managerial; clerical; sales) is made difficult by
periodic major revisions of the occupational classification systems.
These affect in particular estimates of the number of managers. In
Australia, data since 1986 in the `administrative, executive and
managerial' category include `farmers and farm managers', who,
for comparability with New Zealand and with earlier years should be
counted in the transformation sector, and who are therefore removed from
the post-1986 Australian figures.

In New Zealand the 1990 Standard Classification of Occupations
included (correctly) in the managerial category many managerial and
proprietorial workers who under the previous (1968) Classification had
been assigned to the activity they supervised (eg restaurant and hotel
managers classified as `service workers'). Fortunately, we have
highly disaggregated spreadsheets of occupational employment in 1991 set
out for both classification systems, from which the earlier data can be
converted into the 1990 SCO format. Sales and clerical occupations also
required some scaling and splicing to get time-consistent series.

The basic sources of data for both New Zealand and for Australia
are their five-yearly Censuses of Population, most recently held in
1996, supplemented by Input-Output tables for various years. The quality
of information deteriorates as we go further back in time, in particular
with respect to the extent of disaggregation by occupation, by industry
and by part-time/full-time status. The earliest years for which
reasonable numbers could be constructed were 1956 in New Zealand, and
1961 in Australia. The latest reliable year is, of course, 1996, but we
use some annual Statistics NZ data to provisionally estimate figures for
1998. Full details on the construction of the databases are given in the
Appendix.

4. Results: New Zealand 1956-98

Table 1 shows the results from 1956 to 1996, with provisional
figures for 1998. The last column gives the forty year growth ratio for
each row. In New Zealand, total full-time equivalent (FTE) employment
(row 13) increased by 77%, to more than 1.4 million. The rows above show
that this total growth is built up from very different disaggregate
experiences.

Rows 1, 2 and 3 are the numbers of people employed, on an FTE
basis, in transaction occupations: managers, clerks and sales workers
(of whom one half are imputed to the transaction sector in the total on
row 4). The clerical and sales categories grew slightly more than the
average for total employment, but it is the number of managers that
demonstrates quite dramatic change, increasing more than four-fold.

Employment in the specialist transaction industries is shown on
rows 5 through 8. Their share has increased, with the exception of the
National Defence forces, which have been pared back from post-Korean War
days. Finance, Insurance and Real Estate transaction industries'
employment went up about 250%; Business Services increased more than
twice as fast as this.

Perhaps surprisingly, the share of Central and Local Government
administration workers in total employment increased between 1956 and
1996 -- the old `regulated' New Zealand did not apparently need as
many regulators and administrators as does the present system. However,
public sector administrative employment did fall in the 1990s,
especially over the past few years (if the 1998 data are reliable on
this).

To measure all the transaction-related work that goes on, we must
add to dedicated transaction industries' FTEs the transaction
workers in the transformation sector, from row 10, and the
transformation employment used as transaction sector inputs, on row
11(6).

The total transaction-related FTE number is given in row 12 -- it
increased by 180% between 1956 and 1996. If we add the number unemployed
from row 14, and divide by the net number of transformation workers (row
13 minus row 12), we get the ratio of transaction workers (employees and
unemployed) to transformation employment (row 15). We show the ratio,
rather than (as Wallis and North) the share of transaction workers in
total employment, to highlight the fact that, with an approximately
given total labour force, every worker added to the transaction sector
must be subtracted from transformation work.

The transaction/transformation ratio climbs from 0.36 in 1956 to
0.86 in 1996. In fact, the peak census year was 1991, but this
observation may be unusual -- it marks a deep recession in which total
employment actually dropped from 1986, whilst Business Services,
Government Administration and, of course, unemployment grew quite
strongly -- there may be a tendency for transaction employment to be
acyclical or countercyclical, whereas transformation work is
procyclical.

Without unemployment, the transaction/transformation ratio (row 16)
increases less dramatically, to 0.68 in 1996, meaning that two FTE
employed persons in five are now working in the transaction sector. For
the first twenty five years -- 1956-81 -- the ratio grew by 43%
(0.15/0.35), then it grew at a faster rate, by 36% between the 1981 and
1991 Censuses

We noted from Row 1 the particularly rapid growth in the number of
managers and administrators in New Zealand. Row 17 on the table puts
this figure into perspective, by dividing it by the total of all
non-managerial, non-clerical employees. That is, we measure the `span of
control' of managers -- the number of non-clerical workers per
manager (assuming clerks to be a complementary input to management). The
ratio increases nearly three-fold, from 0.06 to 0.17. Put another way,
in the old New Zealand, each manager could handle about sixteen
non-clerical workers; by 1996 this number had dropped to slightly less
than six (and note that the ratio is steady across the three
observations in the 1990s).

The size and rise of the managerial class is certainly striking
enough to warrant more detailed investigation. Statistics New Zealand
provided spreadsheets from the 1991 and 1996 Censuses giving very
detailed tabulations of numbers employed in each 5-digit NZSIC industry
by 5-digit NZSCO occupation. These allow us to examine the anatomy of
the management structure in New Zealand.

Table 2 shows some data. The numbers are for total employees
(full-time and part-time), and so are larger than the full-time
equivalent numbers of Table 1. One possibility is that much of the
growth in managers was in the prepared food and beverages sector, such
as managers of takeaway food outlets, who may have just one or two other
employees under their command. We see that this sector was indeed
relatively highly managed in 1991, with about one manager for every four
total employees. However, the sum of these comes to a bit less than 10%
of the total number of managers in the economy, and so cannot be
responsible for much of the substantial increase in the employment of
this occupation. We can also see that total employment in this sector
rebounded very strongly from 1991 to 1996 (from 58,500 to 82,002), such
that even though the number of managers also went up, the ratio of
managers to total employees actually slipped back, from 26% to 22.5%.

Another query often made concerns the decomposition of bureaucrats
or managers between public and private sectors. Table 2 shows that
public sector administration actually is relatively under-managed, at
around 6%, compared to the overall average of nearly 12%, or, for
example, the quite high ratio of managers to total employees (14-15%) in
the private sector transaction industries, Finance, Insurance & Real
Estate, and Business Services.

Finally, it is of mild interest to note from Table 2 that, in the
aftermath of the 1991 Employment Contracts Act, the number of `Human
Resource Managers' increased by about 25%, to more than 2,500

It would be interesting to have a finer temporal disaggregation of
the numbers, especially for the decade of the 1980s, when growth in
transaction activities accelerated. In particular, was the growth
between 1981 and 1986 censuses concentrated in the years from 1984, and
thus to be linked with the beginning of the `Rogernomics' economic
liberalisations? Unfortunately, annual data on occupational employment
are not available before 1985. But we do have, from Surveys of
Employment, annual data on employment in the private sector transaction
industries -- finance, insurance, real estate and business services.(7)
From rows 5 and 6 of Table 1 above we calculate that total employment in
these industries grew by 25% from 1981 to 1986. The annual data show
that about 9 percentage points of this growth occurred in the first
three years, or 3 points/year, and 16 points in the two years 1984-85
and 1985-86. Transaction employment growth continued to be strong over
the next two years, before collapsing to two years of negative growth
following the October 1987 share market collapse. Thus the transaction
industry `take-off' can be plausibly linked to the financial and
other market reforms.

5. Comparison with Australia

Growth in the transaction sector of the New Zealand economy seems
quite striking, but is it really? Striking compared with what? We get
some perspective on what happened in this country by comparing it with
Australia, a rather larger neighbouring economy which, in particular,
did not go through such a major commercialisation/liberalisation
experience as New Zealand. Naturally, it is not a trivial exercise to
prepare matching data sets for the two countries, and, in particular, it
proved necessary to follow Wallis and North in the United States and
assign all industries in the `FIRE' and Business Services sectors
to the Transaction Industry category, in order to get comparable
classifications for both countries. The result of this is that estimates
of the size of the total transaction worker sector in NZ are higher than
the more accurate (I believe) figures shown above in section 4.

Chart 1 plots transaction/transformation employment numbers for
both countries from 1961 (the first year for which usable Australian
data could be compiled) to 1996. This is what we see: the transaction
ratio begins lower in New Zealand (0.403 compared to 0.434), but grows
faster, and some time before 1986 New Zealand moves above Australia,
reaching a 1996 ratio of 0.714 compared with 0.652. In sum, over the 35
years, the Australian ratio of transaction to transformation workers
increased by 50%; the equivalent New Zealand ratio by 77%. If we
included unemployment in the transaction sector, both growth and the
differences are larger, because unemployment increased more in New
Zealand. Australia grows by 68% from 1961 to 1996; New Zealand by 116%.

[GRAPH OMITTED]

Thus we can see that a change in transaction technology does seem
to have occurred in Australia as in New Zealand, but the change is less
dramatic in the larger country, and is also smoother, with no sign of a
spurt in 1980s, unlike NZ. Australia may have been more `advanced'
or modern than NZ in the 1960s and 1970s, but New Zealand's recent
changes have made it a noticeably more transaction-intensive economy in
the 1990s.

What accounts for the trans-Tasman difference? Perhaps
surprisingly, the share in total employment in 1996 of the specialist
private sector transaction industries (FIRE and Business Services) is
similar in the two countries, and the growth in these industries over
thirty five years was only a little higher in New Zealand. That is, New
Zealand's `more-market' reforms do not seem to have required,
relative to Australia, more workers devoted to the specialist
market-making and market-using industries.

So what does account for the difference? The big factor is the
explosion in managerial numbers in New Zealand, which did not happen in
Australia.

The discrepancy is really quite striking, as Chart 2 shows. The
Australian ratio of number of managers to number of nonclerical
employees starts near 0.1 in 1961, Ssags a bit, then moves up to about
0.11 in the 1990s -- one manager per nine workers

[GRAPH OMITTED]

The New Zealand story, as we have seen, is quite different. The
manager/employee ratio starts at 0.08 in 1961, catches up with Australia
by 1971, edges up a bit more to 1981, and then sprints away
spectacularly, to 0.174, by 1996. Putting this another way, the eventual
difference is equivalent to about one worker in twenty being available
in Australia for directly productive work in the transformation sector
who in New Zealand would be occupied in management activities. Of
course, we hope that these additional managers were able to deploy the
reduced quantity of labour resources under their control so as to
increase their productivity sufficiently for total output to rise.

We can make comparisons of the Australia and New Zealand
transaction costs numbers with the Wallis and North (WN) figures for the
United States. The shares of transaction employment in total employment
in 1971 and 1996 are 0.33 and 0.39 in Australia, and 0.31 and 0.42 in
New Zealand. Assigning 100% instead of 50% of sales workers to the
transaction sector, following WN, increases these shares by about 4
percentage points. WN estimate (1986, Table 3.13) that by 1960-70, about
55% of US GNP is generated in the transaction sector. This includes 9%
of GNP attributed to the Defence industries, which accounts for only
about 1% of employment in New Zealand, and even less in Australia.

That is, in the civilian economy, the transaction sectors of
Australia and New Zealand were substantially smaller (in relative terms)
than was the United States by 1970, and were probably still slightly
smaller in 1996(8), though of course we do not know what has happened to
the US transaction sector ratio since 1970, except that the share of
Defence in GNP has more than halved. Growth in the New Zealand
transaction sector appears to have occurred later than in the United
States, and faster, reflecting perhaps a late-comer's spurt towards
modernisation -- the share of transaction employment in the total grew
by more (61%) in New Zealand over the 35 years 1956-91 than did the
transaction sector share of GDP over the sixty year period 1890-1950 in
the US (57%).

6. Conclusion

To summarise the results: modern New Zealand has experienced a
substantial and quite rapid change in its organisational technology,
towards a more transaction-intensive market structure. This change was
occurring from the beginning of the forty years of our data period, but
appears to have accelerated in the 1980s, during the 1984-91 period of
economic liberalisation and reform, and to have stabilised in the 1990s.
The changes appear to be rapid in comparison with the path of change in
the United States, as documented by Wallis and North, and substantial in
comparison with Australia, such that by 1996 about one more worker in
every twenty who would be doing directly productive
`transformation' work in Australia would in New Zealand be a
transaction worker -- specifically, a manager.

Now, it is worth again stressing that there is nothing inherently
`wrong' with a shift in resources to the transaction sector. On the
contrary, to the extent that productivity growth depends on
specialisation, it is almost inevitable that resources will need to be
diverted to coordination of the division of labour. However, we do not
know enough about the processes generating changes in transaction
technologies to be sure that the overall division of labour between
transformation and transaction activities is necessarily going to be
optimal, especially when an instrumental force in effecting change is
government policy, as it was in New Zealand after 1984.

Some economists, including North and Wallis themselves (1994), have
proposed that market forces will act to minimize the sum of
transformation and transaction costs, but this is still an assumption
not a result. Given that many transaction activities occur in the
setting of Principal/Agent situations, which in turn feed on private
information, or private market power, and given the sheer size of the
transaction-related sector identified by Wallis and North and by these
numbers for Australia and New Zealand, it would be good to have more
formal theoretical attention paid to the positive and normative
implications of transaction-intensive economic systems.

As for the numbers themselves, their true empirical significance
remains to be uncovered. The speed and scale of the change to
transaction employment does add up to a massive structural shift --
larger at least in quantitative terms than any of the better known
structural changes, such as the movement of labour out of agriculture,
and the increase in the share of computers in the capital stock. But
this does not mean that it is necessarily important -- any more than is,
say, the decline in the percentage of adult males who wear hats (another
large structural change in post-war NZ). Other partitions of the data,
for example focussing on the `information sector' (see Engelbrecht
(1997)), may turn out to be more pertinent. Any such conceptualisations
will eventually need to prove their worth empirically, by improving the
explanatory power of our models of productivity and economic growth.

The author thanks three referees and participants in seminars at
the universities of Auckland, Lincoln, Waikato, Edinburgh, Warwick, and
Simon Fraser University, Carleton University, University College Dublin
and the 1997 Industry Economics Conference in Melbourne, for their
comments and suggestions. Statistics New Zealand is thanked for
supplying unpublished spreadsheets of Census data, and the University of
Auckland Research Committee, and the Auckland Business School for
research funding assistance.

(1) See Bollard, Lattimore and Silverstone (1996) for an account of
New Zealand's political economy since 1938.

(2) 0.68/1.68 = 0.405

(3) Both market and intra-firm exchanges take place within the
jurisdiction of the higher authority of government and the legal system.

(4) Wallis and North include transportation activities in the
transformation sector, correctly, in my opinion.

(5) We follow this convention in constructing Australian FTEs, even
though (a) it appears to overestimate the average hours worked by
part-time employees; (b) the cutoff points differ in the two countries
-- part-time is less than 35 hours/week in Australia; less than 30
hours/week in New Zealand.

(8) A caveat in making comparisons is that the Australia and NZ
numbers are employment based measures, whereas Wallis and North use GNP
measures (though in fact, most of their estimates turn out to be
employment-based, too). Dollery and Leong, using a methodology that more
closely follows Wallis and North, report (1998, pp224-5) estimates for
the size of the Australian transaction sector around 1970 that are
closer to the US numbers than those shown here.

Wallis John Joseph and Douglass C North (1986), "Measuring the
Transaction Sector in the American Economy 1870-90", chapter 3 in
Stanley L. Engerman and Robert Z. Gallman (eds), Long-Term Factors in
American Economic Growth, Volume 51, NBER Studies in Income and Wealth,
University of Chicago Press.

Appendix: data definitional and measurement issues

A1: Occupations

The three occupational groups whose work is classified as
transaction activities are Managers, Clerks and (one half of) sales
workers. Censuses give information on numbers in each of these `Major
Groups'. The main problem is that there were two changes in the NZ
Standard Classification of Occupations (SCO), in 1968 and 1990. Splicing
is required. This was dealt with as follows:

The NZSCO 90 Major Group 1, `Legislators, Administrators and
Managers', appears to be defined appropriately. The SCO68 major
group 2, `Administrative, Managerial' includes managers with
generic job descriptions, such as managing director, general manager,
administration/accounting and/or personnel manager, but excludes
managers whose function links them explicitly with an occupational or
industry group, such as `retail and shop manager', and `office
manager', and `working proprietors' for sales and service
sectors. There is a Concordance between the two Standard Classifications
of Occupations which reveals that, even at the most detailed 4 or 5
digit level, there is not always a clean one-to-one map between them.
However, Statistics New Zealand were able to provide disaggregated data
for 1991 classified by each of the SCO systems. If, for that year, we
add up (for the SCO68) all of Major Group 2 (Managerial and
Administrative Workers); minor group 1391 (Head teachers, school
principals); minor groups 3001-9 (Clerical Supervisors); 3101-9
(Government executive officials; 4001-9 (Managers, wholesale and retail
trade; 4010-9 (Working proprietors, wholesale and retail trade); 5001-9
(Managers, catering and lodging services); and 5010-9 (Working
proprietors, catering and lodging services), we get a total (full-time
and part-time) of 167,196 workers, which is larger than the 1991 figure
for SCO90 Major Group 1:162,291. Inspection of the Concordance suggests
that many in the two clerical managerial categories (supervisors and
government executive officials) were classified in the SCO90 as clerical
workers. If we subtract 17% of the totals in these two categories, the
sum of the SCO68 numbers equals the SCO90 figure for total number of
administrators and managers.

Therefore, we perform this adjustment for the Census data from 1971
through 1986, which are all presented under the SCO 68. Of course, the
workers added on to the management category are subtracted from the
total numbers for Clerical and Sales workers.

The occupational classification in force before 1971 was more like
the SCO90 than the SCO68, in its conceptual basis, in that it classified
people by what they do rather than a mixture of what they do and where
(in what industry) they do it. There is no concordance, and no
overlapping data for splicing. Indeed, there were no inter-Censal
occupation employment data at all in these years, so that even a
near-splice is not possible. However, there is no obvious discontinuity
in the series between 1966 and 1971.

Two problematic groups need discussion. `Farm managers' are
classified as agricultural workers (and thus as being in transformation
activities) in both SCOs. Although this will result in some
underestimate of (human) managerial input, it is probably more realistic
as an assumption than the other extreme of including all farm managers
in the management category, because what such people are actually
`managing' (especially on small farms) is mostly land and
machinery, rather than workers.

The other group is (non-clerical) supervisors (including
`foremen'), who are defined in the 1995 SCO manual (the 1995 SCO
differs only in minor respects from the SCO90) as persons `who control
and supervise a group of workers without doing any managerial tasks or
duties', and are directed to be classified to the occupation they
supervise rather than to the managerial category. From a conceptual
transaction costs point of view, it would be better if supervisors were
added in with higher managers -- their omission will bias downwards our
estimates of the numbers involved in administrative work.

A2: Intermediate Use by Transaction Industries of Transformation
output

The transaction sector uses input in addition to the primary labour
(and capital) inputs it employs. WN attribute all intermediate input
purchases by transaction industries to the transaction sector, but this
must involve some double-counting, since some transaction industry
output is purchased by other transaction industries. In this study a
three-step procedure was followed.

First, Input/Output (I/O) tables are used for the available years
to determine the proportion of total gross output of transformation
industries that is purchased by transaction sector industries (for
example, their buildings, desks, paper, computers, cars). Given the
structural shift away from transformation and towards transaction
industries, we expect two opposing forces to operate on this ratio. It
will tend to rise because there will be more transaction output to be
produced, and less transformation output in total from which the
requirements of the transaction sector can be met. But it will tend to
fall to the extent that the structural shift affects the technology of
the transaction sector itself, such that it tends to use relatively more
transaction and fewer transformation inputs.

The proportion of transformation output purchased directly by the
transaction sector is 0.014 in 1971/72, 0.021 in the 1981/82 I/O table,
and then jumps up to 0.035 in 1986/87. The most recent available I/O
table is for 1992/93, and this has some changes in industry definitions.
In particular, the former category `Public Administration'
disappears. The new categories `Central Government Services' and
`Local Government Services' must include activities previously
included in the branches of government deemed to provide transformation
services, as it is twice as large as it would be expected given the SIC
based employment data used here. With this adjustment made, it appears
that the ratio has kept about steady since 1986/87, perhaps
surprisingly. The value for 1992/93 is 0.034.

The second step is to interpolate and extrapolate the I/O-based
ratios to our Census years. The numbers used are 0.009 for 1956, 0.01
for 1961, 0.012 for 1966, 0.018 for 1976, 0.035 for 1991 and 0.034 for
1996.

The third step is to convert these ratios to FTEs, which is done
simply by assuming that the labour/output ratio of this transformation
output used as transaction sector input is the same as the ratio for
total transformation output.

Those managers, clerks and (one half of) sales workers who make up
the designated transaction occupations and who are employed in
designated transaction sector industries must be netted out to avoid
double-counting. Census tables on occupation major group full-time
employment by Industry major division are used for this, with occupation
numbers adjusted for changes in the SCONZ (as noted above). The results
of this are shown on Table A1 (note that only one half of the sales
workers will be assigned to the transaction sector).

A4: Unemployment

Numbers unemployed are as reported in the Censuses. From the 1986
Census, a distinction is made between `unemployed and actively seeking
full-time work' (numbers = 125,094 in 1991) and `unemployed and
actively seeking part-time work' (numbers = 38,676). These two
numbers are simply added together, to maintain consistency with earlier
Census years.

FTEs are defined, following Statistics New Zealand, as the number
of full-time workers plus one half of the number of part-time workers.
Part-time workers are defined as those working fewer than 30 hours/week.
Before the 1986 Census, the official definition of part-time work was
fewer than 20 hours/week, and this was the breakdown used in the
industry-level employment data. For 1986 and before, the number of
part-time workers in each industry is estimated assuming that the
proportion of workers in the total labour force working between 20 and
30 hours/week (for which Census data are given) applies for each
industry, and the FTE number derived from that.

From the 1971 Census and earlier only total numbers employed are
reported at the industry level, and FTEs are constructed assuming that
the total labour force proportions of full and part-time employment
apply to each industry. Note that part-time work in the earlier years is
much less important than it became later, being around or less than 10%
(or 5% of FTEs) up to 1976.

Employment numbers are measured in the explicitly named transaction
industries, and the residual from subtracting total transaction
employment from total employment is assigned to be transformation sector
employment. The main difficulty here is the coarsening of the industrial
disaggregation with older Censuses, especially before 1971, which Census
used the 1968 SIC system. This meant that all insurance industries had
to be lumped together as belonging to the transaction sector, even
though it would be conceptually better to assign life insurance and
possibly fire insurance to the transformation sector.

In terms of the (1987) Standard Industrial Classification, the
transaction industries are:

The Australian data were compiled and processed basically in the
same way as the NZ data. The sources used were hard copies of the
five-yearly Censuses, back to 1961; Input-Output tables for 1968-9,
1978-9, 1986-7, 1992, and 1993-4; and two useful historical data
manuals, The Labour Force, Australia: Historical Summary, 1966 to 1984,
from the Australian Bureau of Statistics, Catalogue No. 6204.0, and
Australian Economic Statistics 1949-50 to 1994-95, Reserve Bank of
Australia, Occasional Paper No. 8 (1996).

It is of course important to achieve consistency, both over time
and with New Zealand. Over time, the Australian definitions of
occupations and industries are more stable than in New Zealand. The only
structural break occurs between 1984 and 1985, which saw Farmers
classified as Managers, and Sales workers lumped together with Personal
Service workers. However, disaggregated data from the Census were
available to be used to continue the time series past 1984 on a
consistent basis.

As for consistency across the Tasman, no concordance is available
between Australian and New Zealand occupational classification codes,
but the language used is quite similar, and it seems reasonable that the
Census authorities in the two countries mean similar things by the
occupational categories `managers', `sales' and
`clerical'.

For industrial classifications, we have now a combined Australia
and New Zealand Industrial Classification System (ANZSIC), with
concordances back to the earlier SICs of the two countries. From these
we can see that the definitions of the transaction service industries
(Finance, Insurance, Real Estate, Business Services) are in aggregate
similar, with the following exceptions: The Australians include `pest
control', `cleaning services' and `scientific research'
in the Business Services category, and NZ does not, and the NZ
definition includes `book publishing', which is placed in the
manufacturing sector in Australia. Unfortunately, disaggregated
Australian data are not available for earlier years, so we are unable to
eliminate these differences in definition from the data. Judging by the
NZ data, the net effect will be to inflate the Australian numbers for
Business Services employment by about one percent of the total labour
force, compared with New Zealand. This means that the Australian
transaction/transformation worker ratios calculated for this study are
higher than they would be if the industry definitions matched those of
New Zealand.